Saudi non-oil revenue to back government spending

The expected increase in Saudi Arabia’s non-oil revenue will support higher government spending in the remainder of 2017, said a new report from Al Rajhi Capital, a top financial services provider in the kingdom.

Government revenue increased to SR144 billion during the first quarter (Q1) of the year, while expenditure was SR170 billion, implying a deficit of SR26 billion, the report highlighted.

The reported Q1 deficit is half the quarterly target of SR49.5 billion. On a quarterly run rate, lower Q1 deficit was mainly due to significantly lower expenditure than target, while Q1 revenue (though up 115 per cent y-o-y) was only slightly lower than the projected run rate of SR170 billion.

“We believe the lower Q1 deficit leaves ample headroom for government spending to rise in the remainder of 2017. However, oil price continues to remain an important determinant of the level of government spending going forward,” Al Rajhi Capital said in the report.

The expected increase in government spending, together with reinstatement of allowances for public sector employees is likely to boost growth in the economy. The government is planning to borrow SR70 billion locally in 2017 and SR37.5-50 billion ($10-15 billion) internationally to fund the 2017 deficit, the report said, quoting data from Bloomberg.

“According to our calculations, banks have around SR100 billion of excess liquidity which can meet Saudi govt’s local borrowing plan of SR70 billion. We also note that the government’s current account (deposits and reserves of the Govt in SAMA) has reduced by SR50.6 billion in Q1 (from SR89 billion at the end of 2016 to SR38.4 billion at the end of Q1), which is more than Q1 fiscal deficit of ~SR26 billion.

“Overall, the decision to update the fiscal position is in-line with a plethora of initiatives rolled out by the Kingdom to improve transparency (a key theme of Vision 2030 plan) which we believe should further boost confidence of investors in the Kingdom,” the report said.

Revenue and Expenditure: Q1 revenue stood at SR144 billion, of which SR112 billion was oil revenue (78 per cent of total revenue). While it is lower than the required quarterly run rate of SR120 billion, oil revenue increased 115 per cent y-o-y due to rise in oil prices. We note that the average Q1 oil price is $53.4/barrel and $52.2/barrel in YTD 2017.

Q1 expenditure at SR170 billion was significantly lower than the target quarterly run rate of SR222.5 billion. “We believe the lower Q1 deficit leaves ample headroom for government spending to rise in remainder of 2017,” Al Rajhi said.

“Based on low Q1 deficit, we now expect that the government spending is likely to increase in Q2/Q3 2017. The expected increase in government spending, together with reinstatement of allowances for public sector employees is likely to boost economy growth going forward,” the report said.

Borrowing position: Q1 2017 debt position at SR307.8 billion is lower than SR316.6 billion at the end of 2016. In Q1, there was no additional borrowing and Q1 fiscal deficit of SR26.2 billion has been met by current account financing. The debt to GDP currently stands at ~13 per cent, which is likely to be capped at 30 per cent by 2020. The Govt plans to borrow SR70 billion locally in 2017 (Source: Bloomberg), while SR33.75 billion ($9 billion) has already been raised from international markets post Q1 2017. Compared to other commodity based economies, Al Rajhi noted that the debt levels in the Kingdom remain very healthy.

Signalling effect: Qualitatively, the decision to update fiscal position on a quarterly basis signals the intention of the Government to improve transparency (a key theme of Vision 2030 plan) which in turn increases investor confidence in the Kingdom at a time when the Govt is trying to attract foreign investments.

Not just transparency, the Kingdom has seen a lot of initiatives rolled out in the recent past including developing its capital markets, improving reporting standards, aligning capital market standards to international standards, the Al Rajhi report said.